1. No category

EUROPEAN
COMMISSION
Brussels, 10.10.2014
C(2014) 7237 final
COMMISSION DELEGATED REGULATION (EU) No …/..
of 10.10.2014
amending Regulation (EU) No 575/2013 of the European Parliament and of the Council
with regard to the leverage ratio
(Text with EEA relevance)
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EXPLANATORY MEMORANDUM
1.
CONTEXT OF THE DELEGATED ACT
1.1
Background and objective
Regulation (EU) No 575/2013 (the Capital Requirements Regulation or CRR) was adopted in
June 2013 as the single rulebook for prudential requirements for institutions (i.e. credit
institutions and investment firms) established in the Union. The need for common rules was
further enhanced by the entry into force of the Single Supervisory Mechanism with the
European Central Bank expected to assume direct supervisory powers over significant credit
institutions authorised in the participating Member States as of November 2014.
The CRR is the first piece of Union law that includes a requirement for institutions to
compute a leverage ratio, report it to their supervisors and disclose it to the public. More
precisely, Article 429 of the CRR requires institutions to calculate their leverage ratio (LR) in
accordance with the methodology laid down in that article. Article 430 requires them to report
the ratio to their competent authorities and Article 451 to publicly disclose it.
One thing the CRR does not contain is a requirement for institutions to have an own funds
requirement based on the LR. The decision on whether such a requirement will be introduced
has been left for a later date. In accordance with Article 511 of the CRR, the European
Commission is required to submit, by the end of 2016, a report on the LR to the Council and
the Parliament. The report will be based on an EBA report and will be accompanied, where
appropriate, by a legislative proposal to introduce a binding LR or different LRs for different
business models, applicable from 1 January 2018 onwards. That proposal will be subject to a
full impact assessment.
The introduction of leverage reporting and disclosure requirements was seen as one of the
elements of the international and European regulatory response to the financial crisis. An
underlying cause of the global financial crisis was the build-up of excessive on- and offbalance sheet leverage in the banking system. In many cases, banks built up excessive
leverage while maintaining strong risk-based capital ratios. The leverage ratio has two
objectives: first to limit the risk of excessive leverage by constraining the building up of
leverage in the banking sector and second to act as a backstop to risk-based capital
requirements.
Article 456(1)(j) of the CRR empowers the Commission to amend the capital measure and
total exposure measure of the LR through a delegated act if the reporting to competent
authorities uncovers shortcomings in the way those measures are currently defined prior to the
date from which institutions must start disclosing the LR (i.e. prior to 1 January 2015). The
European Banking Authority (EBA) has informed the Commission that there are significant
differences in how institutions in different Member States understand and interpret the
existing rules on the LR. Based on the EBA analysis, the Commission considers that these
differences would result in significant differences in the way the LR is calculated. This would
in turn lead to a situation where the numbers disclosed by different institutions would not be
comparable. The Commission has therefore decided to come forward with this delegated act
now in order to formulate these requirements in a clear way so that they can be implemented
effectively and consistently across the European Union.
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Technical note: What is the leverage ratio?
The leverage ratio is defined as follows:
Leverage ratio equals Tier 1 capital divided by exposure measure
While there is no difference between the numerator of the LR and the numerator of the Tier 1
capital ratio (i.e. they both use Tier 1 capital), the two differ in the denominator. The former
uses the so-called exposure measure while the latter uses risk-weighted assets (RWAs).
The calculation of the LR exposure measure uses by and large accounting values for
exposures (it is close to being accounting-rules neutral, i.e. it is calculated in a way that
eliminates the main accounting differences between US GAAP and IFRS) with the exception
of the measurement of derivatives, written credit derivatives and securities financing
transactions1 (SFTs), including repurchase agreements (‘repos’).
While the calculation of RWAs also uses accounting values of exposures as its starting point,
it differs from the exposure measure in that it takes into account eligible credit risk mitigation
techniques such as collateral, mortgages, guarantees or hedges (the values of these are
deducted from the values of exposures) and applies risk weights to the resulting values of
exposures (these risk weights are often below 100%).
1.2
Current leverage ratio requirements in the Union
As indicated in the previous section, there is currently no requirement in EU law to meet an
own funds requirement based on the LR and the disclosure requirement will be applicable
from 1 January 2015 onwards. The only two binding requirements are those concerning the
calculation and reporting of the LR.2
The Commission view at this point is that the LR is designed to cover the risk of excessive
leverage and act as a backstop to the risk sensitive capital requirements. Hence the LR is
neither designed, nor should be calibrated, as the overall leading capital requirement which
would encourage moving away from low risk (weighted) business and possibly leading to
improper risk-pricing for loans and other financial products. In any case this delegated act
does not set any binding calibration of the LR which may be decided upon at the end of 2016
when the Commission will report to the European Parliament and the Council on the impact
of the Leverage Ratio. Where appropriate, the report will be accompanied by a legislative
proposal.
1.3
Impact
The impact assessment3 that was published alongside the CRR proposal on 20 July 2011
included an analysis of the impact of introducing LR-related rules. This impact assessment
justified the adoption of the CRR including the LR-related rules.
In January 2014 the European Banking Authority (EBA) performed an in depth impact
assessment of the LR rules using data provided by approximately 170 banks from 18 Member
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These are repurchase transactions (repos and reverse repos), securities or commodities lending or
borrowing transactions, long settlement transactions and margin lending transactions
In addition, Article 87 of Directive 2013/36/EU (the Capital Requirements Directive or CRD) enables
competent authorities to impose a Pillar 2 LR requirement.
See http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52011SC0949.
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States (the banks were split in two groups: 40 Group 1 (i.e. large) banks and 130 Group 2
banks). The EBA analysed two sets of impacts. First, it looked at the impact of the differences
in interpretation of the rules on the treatment of SFTs where some banks interpreted that
collateral received in a repo transaction could be deducted from the amount receivable –
thereby reducing the impact of these transactions on overall exposures of the institution (the
EBA report refers to this as ‘interpretation 1’).
Second, the EBA assessed the impact of the Basel revised rules text (see section below for
more detail) as it considered that the revised, internationally-agreed rules endorsed by Central
Bank Governors and Heads of Supervision on 14 January 2014 lead to a more accurate
measurement of leverage compared to the previous version of the rules which formed the
basis for the current Article 429 of the CRR.
The following table provides EBA’s indicative overview of the average LRs per group of
banks for interpretations 1 and 2 (i.e. not allowing the deduction allowed under interpretation
1) and the revised Basel III rules text on the LR.
Average leverage ratios (%) by Group 1 and Group 2 banks as assessed by EBA:
Group 1
Group 2
Basel III
3.3
3.9
Interpretation 1
3.3
3.9
Interpretation 2
3.1
3.8
The table shows that on aggregate EU banks would comply with a hypothetical 3% Tier 1 LR
requirement based on the revised Basel standard, regardless of which interpretation of the
treatment of repo transactions exposures is used. This result also reflects the fact that the riskbased capital ratios of many EU banks have significantly improved compared to pre-crisis
levels.
1.4
International developments
In January 2014, the Basel Committee finalised a definition of how the LR should be
computed and set an indicative benchmark (namely 3% of Tier 1 capital). The 3% Tier 1 LR
will be tested during the monitoring period until 2017 when the Basel Committee will decide
on the final calibration. The Basel Committee LR rules text4 clarifies the interpretation issue
pointed out by EBA. It makes clear that a strict interpretation of the treatment of repo
transactions is to be preferred for prudential reasons.
1.5
Major substantial changes compared to the current text
The following substantial changes were made compared to the current text of Article 429 of
the CRR:
1.
A clarification that for SFTs collateral received cannot be used to reduce the
exposure value of said SFTs but that cash receivables and payables of SFTs with the
same counterparty, and subject to strict criteria, can be netted;
2.
A calculation and reporting period defined as at the end of the reporting period
(quarter) instead of a three-month average. This amendment not only reduces the
operational burden for institutions but also aligns the LR with the solvency reporting
data to which it should acts as a backstop;
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http://www.bis.org/publ/bcbs270.pdf
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3.
Using the credit risk conversion factors (CCFs) of the standardised approach for
credit risks of 0%, 20%, 50%, or 100% depending on the risk category, subject to a
floor of 10 %, instead of the 100% weighting of off-balance sheet exposures;
4.
For derivatives, cash variation margin received can be deducted from the exposure
value;
5.
Written credit derivatives are measured at their gross notional amount instead of at
their fair value, but fair value changes recognised through P&L (losses) can be
deducted from the notional amount. Also, offsetting of protection sold with
protection bought is allowed, subject to strict criteria;
6.
The deduction from the LR of the client leg of transactions with a Qualifying Central
Counterparty (QCCP) where the institution has no obligation to reimburse the client
if the QCCP would default as it does not create leverage.
7.
The scope of consolidation will be the regulatory scope of consolidation used for the
risk-based framework instead of the accounting scope of consolidation.
Given that the original provisions in the CRR mirrored those of the Basel standards, the
solutions found to the shortcomings of the Basel rules are also fit for the purpose of
addressing the corresponding shortcomings of the relevant provisions in the CRR.
While the changes proposed in this delegated act are generally aligned with the Basel revised
standards on the LR, one of those changes addresses a 'Union specificity' that is not addressed
by those standards. This specificity stems from the fact that, compared to the Basel
framework, the CRR has a broader scope of application. The CRR applies to all banks (and
investment firms) established in the Union, at both consolidated and individual level, while
the Basel framework applies only to (large) internationally active banks, generally at
consolidated level. This broad scope of application applies both for risk-based capital
requirements and LR-related requirements under the CRR. However, unlike the risk-based
capital requirements, the LR-related requirements do not currently foresee a specific treatment
of intragroup exposures when institutions apply the CRR at individual level. In order to align
the two, this delegated act therefore foresees, subject to approval from the competent
authority and subject to certain conditions, the possibility to exclude intra group exposures
when the LR rules are applied at individual level. The application of the LR at individual level
to intragroup exposures, when risk-based capital requirements are not applied at this level,
would not be consistent with the role of the leverage ratio as a backstop to the risk-based
capital requirements. This is particularly relevant for co-operative banking groups that have
many smaller entities affiliated to a central body.
2.
CONSULTATIONS PRIOR TO THE ADOPTION OF THE ACT
The Commission organised on 10 March 2014 a public hearing with stakeholders.
Subsequently the Commission received about 60 written comment letters and contributions
most of which came from banks and business associations.
The vast majority of respondents were supportive of the LR as a supplementary backstop to
the risk-based capital measure. Three main issues were raised: 1) the need for further
clarification of the criteria to allow cash variation margin received to be deducted from the
exposure value of derivatives; 2) the netting of cash receivables and payables for repos and
reverse repos with the same counterparty (for example a CCP); and 3) the exclusion of
intragroup exposures from the exposure measure when the LR is applied at individual level.
The main drivers behind the third issue were concerns about the impact on:
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(a)
internal refinancing operations between the parent company and its affiliates;
(b)
derivatives operations between the group’s investment bank and other entities of the
group: this way of operating was reinforced by Regulation (EU) No 648/2012
(EMIR); and
(c)
financial guarantees.
As mentioned in the previous section, this issue is caused by an extended scope of application
in the Union as compared to the internationally agreed text and is addressed by a specific
provision in the delegated act.
Another issue raised by industry was the treatment of open repos. These are repos that can be
terminated at any day subject to an agreed recall notice period (often 2 to 3 days) and are
economically comparable to US, rolled-over, overnight repos. Approximately 13% of repos in
the EU are “open”. The Commission would support the view that European open repos should
be considered equivalent to having an explicit maturity equal to the recall notice period and
the "same explicit final settlement date" should be deemed to be met. This would mean that
such transactions are eligible for the netting of cash receivables and payables of repurchase
transactions and reverse repurchase transactions with the same counterparty.
3.
LEGAL ELEMENTS OF THE DELEGATED ACT
As explained in Section 1.1., the CRR contains different articles related to the LR: the
definition and calculation (Article 429), the level of application (Articles 6 and 11), the
supervisory reporting (Article 430), the disclosure (Article 451), and the review (Article 511).
The co-legislators delegated via Article 456(1)(j) to the Commission the power to fine-tune
the composition of the Leverage Ratio by amending the relevant Article in the CRR (Article
429) before its disclosure becomes mandatory from 1 January 2015 onwards. As already
pointed out in section 1.2, the EBA discovered that the current CRR text had been interpreted
differently by institutions, therefore creating the need to clarify the text of Article 429 CRR.
To address this issue the delegated act modifies the way in which the LR must be calculated,
and hence reported to supervisors and disclosed. The proposed modifications are fully
compatible with the legal mandate.
Once the delegated act is adopted, the supervisory reporting template and the common
disclosure template will need to be amended accordingly.
The delegated act restructures Article 429 by splitting off some of the existing paragraphs into
two new Articles:
(a)
Article 429a provides the general treatment of the exposure value of derivatives
(both on- and off-balance sheet) as well as the additional treatment of cash variation
margin and written credit derivatives;
(b)
Article 429b provides a specific treatment of the exposure value of cash receivables
and cash payables of SFTs (both on- and off-balance sheet), including:
•
the criteria for netting cash receivables and payables for repo and reverse repo
transactions with the same counterparty;
•
the “add-on” measure for SFTs with a counterparty; and
•
the treatment of the “add-on” measure when a bank is acting as an agent.
Using separate Articles provides a better overview of the basic calculation and measurement
principles of the LR. Given the change to the structure of Article 429 and the addition of
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Articles 429a and 429b, it was necessary to change correspondingly the first paragraph of
Article 429, in order to keep the correct references. Therefore, for the purposes of clarity and
in view of the changes to the structure of the Article, it was deemed preferable to replace the
whole of Article 429 whilst keeping all the essential elements, not covered by the
empowerment, intact.
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COMMISSION DELEGATED REGULATION (EU) No …/..
of 10.10.2014
amending Regulation (EU) No 575/2013 of the European Parliament and of the Council
with regard to the leverage ratio
(Text with EEA relevance)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union,
Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the
Council of 26 June 2013 on prudential requirements for credit institutions and investment
firms and amending Regulation (EU) No 648/20125, and in particular Article 456(1)(j)
thereof,
Whereas:
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(1)
The leverage ratio calculated in accordance with Article 429 of Regulation (EU) No
575/2013 is to be disclosed by institutions from 1 January 2015 onwards and before
that date, the Commission is empowered to adopt a delegated act amending the
exposure and capital measure for calculating the leverage ratio to correct any
shortcomings detected on the basis of reporting by institutions.
(2)
Differences have been observed in the reported leverage ratios referred to in Article
429(2) of Regulation (EU) No 575/2013 due to diverging interpretation by institutions
of the netting of collateral in securities financing and repurchase transactions. These
differences in interpretation and reporting have become manifest following the
analytical report published on 4 March 2014 by the European Banking Authority
(EBA).
(3)
Given that the provisions of Regulation (EU) No 575/2013 mirrored those of the Basel
standards, the solutions found to the shortcomings of the Basel rules are also fit for the
purpose of addressing the corresponding shortcomings of the relevant provisions of
that Regulation.
(4)
The Basel Committee adopted on 14 January 2014 a revised rules text on the leverage
ratio with in particular additional measurement and netting arrangements for
repurchase transactions and securities financing transactions. Alignment of the
provisions of Regulation (EU) No 575/2013 concerning the calculation of the leverage
ratio with the internationally agreed rules should address diverging interpretations by
institutions for the netting of collateral of securities financing and repurchase
transactions and should also enhance international comparability as well as create a
level playing field for institutions that are established in the Union and operate
internationally.
5
OJ L 176, 27.6.2013, p. 1.
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(5)
Clearing via central counter parties under the principal model commonly used in the
Union creates a double counting of leverage in the exposure measure of an institution
acting as a clearing member.
(6)
Clearing of securities financing transactions, especially repurchase transactions,
through qualifying central counterparties (QCCPs) can bring advantages such as
multilateral netting and robust collateral management processes which enhance
financial stability. Cash receivables and payables for repurchase and reverse
repurchase transactions via the same QCCP should therefore be allowed to be netted.
(7)
Repurchase transactions that can be terminated at any day subject to an agreed recall
notice period should be considered equivalent to having an explicit maturity equal to
the recall notice period and the "same explicit final settlement date" should be deemed
to be met so that such transactions are eligible for the netting of cash receivables and
payables of repurchase transactions and reverse repurchase transactions with the same
counterparty.
(8)
The revised leverage ratio should lead to a more accurate measure of leverage and
should serve as a proportionate constraint on the accumulation of leverage in
institutions established in the Union.
(9)
Point in time reporting of the leverage ratio at the end of the quarterly reporting period
rather than reporting on the basis of a three-month average better aligns the leverage
ratio with solvency reporting.
(10)
Using gross notional amounts for written credit protection issued by an institution
more appropriately reflects leverage as compared to using the mark to market method
for those instruments.
(11)
The scope of consolidation for calculating the leverage ratio should be aligned with the
regulatory scope of consolidation used for determining the risk weighted capital ratios.
(12)
The changes introduced by this Regulation should lead to better comparability of the
leverage ratio disclosed by institutions and should help to avoid misleading market
participants as to the real leverage of institutions. It is therefore necessary that this
Regulation enters into force as soon as possible.
(13)
Regulation (EU) No 575/2013 should therefore be amended accordingly,
HAS ADOPTED THIS REGULATION:
Article 1
Regulation (EU) No 575/2013 is amended as follows:
(1)
Article 429 is replaced by the following:
“Article 429
Calculation of the leverage ratio
1.
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Institutions shall calculate their leverage ratio in accordance with the methodology
set out in paragraphs 2 to 13.
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2.
The leverage ratio shall be calculated as an institution's capital measure divided by
that institution's total exposure measure and shall be expressed as a percentage.
Institutions shall calculate the leverage ratio at the reporting reference date.
3.
For the purposes of paragraph 2, the capital measure shall be the Tier 1 capital.
4.
The total exposure measure shall be the sum of the exposure values of:
5.
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(a)
assets referred to in paragraph 5 unless they are deducted when determining the
capital measure referred to in paragraph 3;
(b)
derivatives referred to in paragraph 9;
(c)
add-ons for counterparty credit risk of repurchase transactions, securities or
commodities lending or borrowing transactions, long settlement transactions
and margin lending transactions including those that are off-balance sheet
referred to in Article 429b;
(d)
off-balance sheet items referred to in paragraph 10.
Institutions shall determine the exposure value of assets, excluding contracts listed in
Annex II and credit derivatives, in accordance with the following principles:
(a)
the exposure values of assets means exposure values in accordance with the
first sentence of Article 111(1);
(a)
physical or financial collateral, guarantees or credit risk mitigation purchased
shall not be used to reduce exposure values of assets;
(b)
loans shall not be netted with deposits;
(c)
repurchase transactions, securities or commodities lending or borrowing
transactions, long settlement transactions and margin lending transactions shall
not be netted.
6.
Institutions may deduct from the exposure measure set out in paragraph 4 of this
Article the amounts deducted from Common equity Tier 1 capital in accordance with
Article 36(1)(d).
7.
Competent authorities may permit an institution not to include in the exposure
measure exposures that can benefit from the treatment laid down in Article 113(6).
Competent authorities may grant that permission only where all the conditions set
out in points (a) to (e) of Article 113(6) are met and where they have given the
approval laid down in Article 113(6).
8.
By way of derogation from point (d) of paragraph 5, institutions may determine the
exposure value of cash receivables and cash payables of repurchase transactions,
securities or commodities lending or borrowing transactions, long settlement
transactions and margin lending transactions with the same counterparty on a net
basis only if all the following conditions are met:
(a)
the transactions have the same explicit final settlement date;
(b)
the right to set off the amount owed to the counterparty with the amount owed
by the counterparty is legally enforceable in all the following situations:
(i)
in the normal course of business;
(ii)
in the event of default, insolvency and bankruptcy;
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(c)
the counterparties intend to settle net, settle simultaneously, or the transactions
are subject to a settlement mechanism that results in the functional equivalent
of net settlement.
For the purposes of point (c) of the first subparagraph, a settlement mechanism
results in the functional equivalent of net settlement if, on the settlement date, the net
result of the cash flows of the transactions under that mechanism is equal to the
single net amount under net settlement.
9.
Institutions shall determine the exposure value of contracts listed in Annex II and of
credit derivatives including those that are off-balance sheet, in accordance with
Article 429a.
10.
Institutions shall determine the exposure value of off-balance-sheet items, excluding
contracts listed in Annex II, credit derivatives, repurchase transactions, securities or
commodities lending or borrowing transactions, long settlement transactions and
margin lending transactions, in accordance with Article 111(1). However, institutions
shall not reduce the nominal value of those items by specific credit risk adjustments.
In accordance with Article 166(9), where a commitment refers to the extension of
another commitment, the lower of the two conversion factors associated with the
individual commitment shall be used. The exposure value of low risk off- balance
sheet items referred to in Article 111(1)(d) shall be subject to a floor equal to 10% of
their nominal value.
11.
An institution that is a clearing member of a QCCP may exclude from the calculation
of the exposure measure trade exposures of the following items, provided that those
trade exposures are cleared with that QCCP and meet, at the same time, the
conditions laid down in Article 306(1)(c):
(a)
contracts listed in Annex II;
(b)
credit derivatives;
(c)
repurchase transactions;
(d)
securities or commodities lending or borrowing transactions;
(e)
long settlement transactions;
(f)
margin lending transactions.
12.
Where an institution that is a clearing member of a QCCP guarantees to the QCCP
the performance of a client that enters directly into derivative transactions with the
QCCP, it shall include in the exposure measure the exposure resulting from the
guarantee as a derivative exposure to the client in accordance with Article 429a.
13.
Where national generally accepted accounting principles recognise fiduciary assets
on balance sheet, in accordance with Article 10 of Directive 86/635/EEC, those
assets may be excluded from the leverage ratio total exposure measure provided that
they meet the criteria for non-recognition set out in International Accounting
Standard (IAS) 39, as applicable under Regulation (EC) No 1606/2002, and, where
applicable, the criteria for non-consolidation set out in International Financial
Reporting Standard (IFRS) 10, as applicable under Regulation (EC) No 1606/2002.
14.
Competent authorities may permit an institution to exclude from the exposure
measure exposures that meet all of the following conditions:
(a)
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they are exposures to a public sector entity;
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(2)
(b)
they are treated in accordance with Article 116(4);
(c)
they arise from deposits that the institution is legally obliged to transfer to the
public sector entity referred to in point (a) for the purposes of funding general
interest investments.”
The following Articles 429a and 429b are inserted:
“Article 429a
Exposure value of derivatives
1.
Institutions shall determine the exposure value of contracts listed in Annex II and of
credit derivatives, including those that are off-balance sheet, in accordance with the
method set out in Article 274. Institutions shall apply Article 299(2)(a) for the
determination of the potential future credit exposure for credit derivatives.
When determining the potential future credit exposure of credit derivatives,
institutions shall apply the principles laid down in Article 299(2)(a) to all their credit
derivatives, not only those assigned to the trading book.
In determining the exposure value, institutions may take into account the effects of
contracts for novation and other netting agreements in accordance with Article 295.
Cross-product netting shall not apply. However, institutions may net within the
product category referred to in point (25)(c) of Article 272 and credit derivatives
when they are subject to a contractual cross-product netting agreement referred to in
Article 295(c).
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2.
Where the provision of collateral related to derivatives contracts reduces the amount
of assets under the applicable accounting framework, institutions shall reverse that
reduction.
3.
For the purposes of paragraph 1, institutions may deduct variation margin received in
cash from the counterparty from the current replacement cost portion of the exposure
value in so far as under the applicable accounting framework the variation margin
has not already been recognised as a reduction of the exposure value and when all the
following conditions are met:
(a)
for trades not cleared through a QCCP, the cash received by the recipient
counterparty is not segregated;
(b)
the variation margin is calculated and exchanged on a daily basis based on
mark-to-market valuation of derivatives positions;
(c)
the variation margin received in cash is in the same currency as the currency of
settlement of the derivative contract;
(d)
the variation margin exchanged is the full amount that would be necessary to
fully extinguish the mark-to-market exposure of the derivative subject to the
threshold and minimum transfer amounts applicable to the counterparty;
(e)
the derivative contract and the variation margin between the institution and the
counterparty to that contract are covered by a single netting agreement that the
institution may treat as risk-reducing in accordance with Article 295.
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For the purposes of point (c) of the first subparagraph, where the derivative contract
is subject to a qualifying master netting agreement, the currency of settlement means
any currency of settlement specified in the derivative contract, the governing
qualifying master netting agreement or the credit support annex to the qualifying
master netting agreement.
Where under the applicable accounting framework an institution recognises the
variation margin paid in cash to the counterparty as a receivable asset, it may exclude
that asset from the exposure measure provided that the conditions in points (a) to (e)
are met.
4.
5.
For the purposes of paragraph 3 the following shall apply:
(a)
the deduction of variation margin received shall be limited to the positive
current replacement cost portion of the exposure value;
(b)
an institution shall not use variation margin received in cash to reduce the
potential future credit exposure amount, including for the purposes of Article
298 (1)(c)(ii);
In addition to the treatment laid down in paragraph 1, for written credit derivatives
institutions shall include in the exposure value the effective notional amounts
referenced by the written credit derivatives reduced by any negative fair value
changes that have been incorporated in Tier 1 capital with respect to the written
credit derivative. The resulting exposure value may be further reduced by the
effective notional amount of a purchased credit derivative on the same reference
name provided that all the following conditions are met:
(a)
for single name credit derivatives, the credit derivatives purchased must be on
a reference name which ranks pari passu with or is junior to the underlying
reference obligation of the written credit derivative and a credit event on the
senior reference asset would result in a credit event on the subordinated asset;
(b)
where an institution purchases protection on a pool of reference names, the
purchased protection may offset sold protection on a pool of reference names
only if the pool of reference entities and the level of subordination in both
transactions are identical;
(c)
the remaining maturity of the credit derivative purchased is equal to or greater
than the remaining maturity of the written credit derivative;
(d)
in determining the additional exposure value for written credit derivatives, the
notional amount of the purchased credit derivative is reduced by any positive
fair value change that has been incorporated in Tier 1 capital with respect to the
credit derivative purchased;
(e)
for tranched products, the credit derivative purchased as protection is on a
reference obligation which ranks equal to the underlying reference obligation
of the written credit derivative.
Where the notional amount of a written credit derivative is not reduced by the
notional amount of a purchased credit derivative, institutions may deduct the
individual potential future exposure of that written credit derivative from the total
potential future exposure determined according to paragraph 1 of this Article in
conjunction with Article 274(2) or Article 299(2)(a) as applicable. In case that the
potential future credit exposure shall be determined in conjunction with Article
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298(1)(c)(ii), PCEgross may be reduced by the individual potential future exposure of
written credit derivatives with no adjustment made to the NGR.
6.
Institutions shall not reduce the written credit derivative effective notional amount
where they buy credit protection through a total return swap and record the net
payments received as net income, but do not record any offsetting deterioration in the
value of the written credit derivative reflected in Tier 1 capital.
7.
In case of purchased credit derivatives on a pool of reference entities, institutions
may recognise a reduction according to paragraph 5 on written credit derivatives on
individual reference names only if the protection purchased is economically
equivalent to buying protection separately on each of the individual names in the
pool. If an institution purchases a credit derivative on a pool of reference names, it
may only recognise a reduction on a pool of written credit derivatives when the pool
of reference entities and the level of subordination in both transactions are identical.
8.
By way of derogation from paragraph 1 of this Article, institutions may use the
method set out in Article 275 to determine the exposure value of contracts listed in
points 1 and 2 of Annex II only where they also use that method for determining the
exposure value of those contracts for the purposes of meeting the own funds
requirements set out in Article 92.
When institutions apply the method set out in Article 275, they shall not reduce the
exposure measure by the amount of variation margin received in cash.
Article 429b
Counterparty credit risk add-on for repurchase transactions, securities or commodities
lending or borrowing transactions, long settlement transactions and margin lending
transactions
1.
In addition to the exposure value of repurchase transactions, securities or
commodities lending or borrowing transactions, long settlement transactions and
margin lending transactions including those that are off-balance sheet in accordance
with Article 429(5), institutions shall include in the exposure measure an add-on for
counterparty credit risk determined in accordance to paragraph 2 or 3 of this Article,
as applicable.
2.
For the purposes of paragraph 1, for transactions with a counterparty which are not
subject to a master netting agreement that meets the conditions laid down in Article
206 the add-on (Ei*)shall be determined on a transaction-by-transaction basis in
accordance with the following formula:
where:
Ei is the fair value of securities or cash lent to the counterparty under transaction i;
Ci is the fair value of cash or securities received from the counterparty under
transaction i.
3.
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For the purposes of paragraph 1, for transactions with a counterparty that are subject
to a master netting agreement that meets the conditions laid down in Article 206, the
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add-on for those transactions (Ei*) shall be determined on an agreement-byagreement basis in accordance with the following formula:
where:
Ei is the fair value of securities or cash lent to the counterparty for the transactions
subject to master netting agreement i;
Ci is the fair value of cash or securities received from the counterparty subject to
master netting agreement i.
4.
By way of derogation from paragraph 1 of this Article, institutions may use the
method set out in Article 222, subject to a 20% floor for the applicable risk weight,
to determine the add on for repurchase transactions, securities or commodities
lending or borrowing transactions, long settlement transactions and margin lending
transactions including those that are off-balance sheet. Institutions may use this
method only where they also use it for determining the exposure value of those
transactions for the purpose of meeting the own funds requirements as set out in
Article 92.
5.
Where sale accounting is achieved for a repurchase transaction under its applicable
accounting framework, the institution shall reverse all sales-related accounting
entries.
6.
Where an institution acts as an agent between two parties in repurchase transactions,
securities or commodities lending or borrowing transactions, long settlement
transactions and margin lending transactions including those that are off-balance
sheet, the following apply:
(a)
where the institution provides an indemnity or guarantee to a customer or
counterparty limited to any difference between the value of the security or cash
the customer has lent and the value of collateral the borrower has provided it
shall only include in the exposure measure the add-on determined in
accordance with paragraph 2 or 3, as applicable;
(b)
where the institution does not provide an indemnity or guarantee to any of the
involved parties, the transaction shall not be included in the exposure measure;
(c)
where the institution is economically exposed to the underlying security or
cash in the transaction beyond the exposure covered by the add-on, it shall
include also in the exposure measure an exposure equal to the full amount of
the security or cash.”.
Article 2
This Regulation shall enter into force on the day following that of its publication in the
Official Journal of the European Union.
This Regulation shall be binding in its entirety and directly applicable in all Member States.
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Done at Brussels, 10.10.2014
For the Commission
The President
José Manuel BARROSO
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